Time and again, the question I hear from clients the most is how to choose what financial priorities to put first. It sounds like it should be a simple exercise, but most of us don’t have unlimited money lying around to fulfill all our current and future financial needs and wants. So when you’re working with limited funds, what’s really important? How can you invest for the future and still live the life you want today?
Assess Your Goals
Before you can form a game plan for your finances, you need to understand what you’re working toward in the short, mid, and long-term. What do you want most and when? For tips on how to accomplish this, read our article about goal setting and download our free template. This step is important for two reasons: it will help you see just where you should be directing funds, and it can keep you motivated on those days where saving for a longer term goal seems painfully impossible and unpleasant.
Start With a Basic Framework
Once you’ve laid out your goals, you can start with a basic framework for how to achieve financial security. I call it my “9 Steps to Financial Security”, but in actuality many of these steps may overlap.
The best approach is to look at the steps as a whole and not individually, since often there are steps that can occur simultaneously. For instance, you may need to continue to pay down your debt while you establish an emergency fund. Often these moves can’t wait for you to finish the previous step, so keep the big picture in mind at all times. That being said here are two big prioritization debates I tend to see:
Debt vs. Savings
These two goals should typically be tackled simultaneously if you’re still playing catch up. For instance, if you’re trying ferociously to pay off your credit card debt, you may feel like you want to focus 100% of your effort on knocking those scary numbers down. However, life will always have it’s own plans for you, and that makes it essential to have at least a small emergency fund available at all times. If you’re caught in a situation where you have no emergency fund, the best thing you can do is to save a $1,000 rainy day fund while continuing to pay the minimum monthly payments on your debts until that small emergency fund has been established. The reasoning behind this is that it will ultimately save you money down the line when an emergency does happen and you have the cash to cover it. The alternative is to cover those expenses with a credit card which will end up accruing interest and perpetuate your downward spiral into debt. Do yourself a favor and build yourself a small emergency fund ASAP! And remember to replenish your emergency fund if you have to dip into it. Life is always full of expensive surprises.
Retirement vs. College Savings
Retirement savings versus saving for your children’s education is another common question when it comes to saving for the long term. The short answer is that retirement savings is more important, but the long answer is more complicated. The reason financial professionals will advise you to fund your retirement accounts first is that no one is going to help finance your retirement. When it comes to education, loans and financial aide will always be available, but in the case of retirement we’re on our own. That being said, the first thing you should be doing is maxing out any contributions to your employer sponsored retirement accounts that will be matched by your employer. After that you can use this calculator to see if you’re saving enough towards retirement and use any excess funds you have to invest for the future educational needs of your children.
As a side note, your retirement savings accounts may have a built-in college savings option included in them that you didn’t know about. Take a look at your plan policies for potential “hardship distributions”. These are plan specific exceptions that may permit you to withdraw money from your accounts prior to retirement age for things such as purchasing your first home or financing your children’s education. Most plans have them built right in, so make sure you read the fine print or talk to your plan administrator to see if this is an option for you.
Ask for Help
If you’re not sure where to start with your financial to do list, there are professionals that can help walk you through it. Here at Budget Babble, we love to work one on one with you to develop a plan that will get you where you want to go financially. You can learn more about our services here, or alternatively, find an accountant or financial advisor in your area that you feel you can really trust and who spends time to explain concepts to you in a clear and concise manner. When in doubt, ask for help!
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.